Tribune board returns the fire

Tribune Company was founded in 1847. That year, on June 10, the Chicago Tribune published its first edition in a one-room plant located at LaSalle and Lake Streets. The original press run consisted of 400 copies printed on a hand press. In 1983, after 136 years of private ownership, Tribune became a public company with an initial offering of 7.7 million shares valued at $206 million. The opening price per share was $26.75. The company's New York Stock Exchange ticker symbol was TRB. In December of 2007, Tribune returned to private ownership through a leveraged transaction led by Sam Zell. In late 2008, following a severe downturn in the economy and a prolonged advertising slump, Tribune filed for protection under Chapter 11 of the U.S. Bankruptcy Code.

Tribune Co.'s independent directors fired back at the Chandler family Thursday, accusing the super-rich California clan of putting their own financial interests head of other shareholders.

In a letter signed by Tribune lead director William Osborn and six other independent board members, the directors defended their support of a $2 billion stock buyback plan that the Chandlers say weakens the company.

"Our unwillingness to delay the tender offer in order to accommodate your demands ... was based on our good faith judgment that the tender offer benefited all shareholders, while your proposed restructuring [of some Tribune-Chandler partnerships] primarily benefited the Chandler Trusts at the expense of other shareholders," the directors wrote.

The Chandlers were asking Tribune to unwind two complex partnerships that hold more than $3.5 billion in real estate and Tribune stock before proceeding with the share buyback. But those proposed transactions would have resulted in a big tax bill for Tribune, an outcome the company's management was adamantly opposed to.

The board members also said they remain firmly behind the turnaround plans laid out recently by Tribune Chairman, President and Chief Executive Dennis FitzSimons.

The Chandler family holds three seats on the company's board and controls more than 12 percent of Tribune stock as a result of Tribune's $8.3 billion acquisition of Times Mirror Co. in 2000.

In an 11-page letter to Tribune's board made public Wednesday, the Chandlers charged that Tribune should have articulated a viable long-term strategy before embarking on a financial re-engineering. "We believe that this sequencing--financial structure in advance of strategy--is backwards," the letter states.

On Thursday, a spokesman for the family trust funds said: "The Tribune Co. has valuable assets. We believe there's a better strategic plan for the company than the one that has resulted in a 40 percent decline in the stock price over the past few years."

The dissension continued to buoy Tribune stock, which rose to a seven-month high Thursday even as the company's debt rating was cut to junk status.

Tribune shares rose nearly 2 percent, to close at $32.51 per share, as investors bet that the ongoing boardroom battle would lead to a wider restructuring of the Chicago-based media concern, which owns this newspaper. Credit Suisse First Boston raised its rating on Tribune stock to "outperform" from "neutral" Thursday, citing just such a scenario.

The stock closed a penny above the $32.50 maximum price that Tribune is offering to buy back 53 million shares in a tender offer scheduled to close June 26. That virtually ensures that large investors will wait until the last minute to decide whether to tender their shares, Wall Street experts said.

Meanwhile, Moody's Investors Service reduced its ratings on $5 billion in Tribune debt to non-investment grade. The ratings agency said it was uneasy about Tribune's plans to borrow $2 billion to fund the share buyback.

If Tribune's feuding directors can't compromise, the rest of the company's shareholders could be in store for the business equivalent of civil war--an ugly and costly proxy fight, corporate governance experts predict. In a proxy battle, dissident shareholders campaign to elect directors who support their cause.

In their letter to the board, the Chandlers said they are willing to go that route.

"If timely action is not taken ... we intend to begin actively pursing possible changes in Tribune's management and other transactions to enhance the value realized by all Tribune stockholders by engaging with other stockholders and other parties," the Chandlers wrote.

Through their public disparagement of the Tribune's strategy, the Chandlers are trying to rally shareholder support for their position, said Shirley Westcott, a managing director at Proxy Governance, which advises institutional investors on proxy matters.

"The media attention is key here," she said, noting that it builds awareness of reasons for the Chandlers' discontent.

But proxy fights are very costly and time-consuming, making them "the nuclear option," said Bob McCormick, vice president of proxy research at Glass, Lewis & Co., another proxy advisory firm. Dissidents must spend millions to communicate with fellow shareholders and advocate their positions. Management and pro-management directors must counter with their own multimillion-dollar campaigns, which are essentially funded with shareholder money.

Walter Hewlett reportedly spent $30 million in a proxy fight to stop Hewlett-Packard's acquisition of Compaq. He lost, and the acquisition went forward. Likewise, billionaire investor Samuel Wyly reportedly spent $14 million waging a proxy war to oust five directors of Computer Associates. He later dropped his fight in exchange for $10 million from the company and the softwaremaker's promise to add another independent director.

Tribune's annual meeting was held just last month, so any proxy fight would appear to be a ways off.

Also complicating a proxy fight is the fact that Tribune's board is elected on a staggered basis, which means only a portion of the board is up for election each year.

"A proxy fight doesn't do anybody any good," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. In addition to airing things management would rather keep confidential, such battles distract top executives from the company's operations, he added.

The kind of split seen on Tribune's board is rare, experts in corporate governance agree.

"Usually if you have a dissident director and that person couldn't convince the rest of the board, he would just leave the board," said Benjamin Hermalin, chairman of the economics department at the University of California at Berkeley.

But when dissidents have major stock holdings, the situation is different, he said. Then there is an incentive to stay and fight.

Sarah Peck, associate professor of finance at the Marquette University College of Business Administration, predicts that both sides are reaching out to major shareholders, trying to find allies in the hope of gaining strength in negotiations.

"You may get some outside shareholder coming into the fray that could swing the board one direction or another," Peck said. "Sometimes the hedge funds play that role."

The effect of a divided board is hard to predict, Hermalin said.

"If you have three directors who create a lot of noise and nobody pays attention to them, then they are annoying but you just ignore it and you get on with your life," he said. "But if they are causing other investors uncertainty about what is next at Tribune Co., then it's a real problem."